# Expected growth rate of a stock

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IBM just paid (t=0) a $2.00 dividend. The required rate of return for IBM stock is 22%. If a price of a share of IBM is expected to be $82.1516 at the end of year 2 (t=2), what is IBM's expected growth rate?

possible answers:

a)16% b)11% c)11.5% d)18% e)10.5%

f)14.5% g)16.5% h)12% i)22.5% j)13.5%

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## SOLUTION This solution is **FREE** courtesy of BrainMass!

Answer: d)18%

D0 = $2.00

D1 = 2(1+g)

D2 = 2(1+g)^2

D3 = 2(1+g)^3

P2= Div3/ (r-g)

P2= 82.1516

r= 22%

Therefore 82.1516= 2 (1+g)^3/ (22%-g)

Solving this equation

g= 18%

Check

P2= Div3/ (r-g)

Div3 = 3.286064 =2x(1+18%)^3

r= 22%

g=

Po= 82.1516

There is one unknown g; solving for g ,

g= 18.%

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